Can compliance-challenged Veritas sell compliance?

Files 10K at the third attempt

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Can you sell regulatory compliance software and services when your own company has trouble meeting regulatory demands? That's the question Veritas CEO Gary Bloom must be asking himself this week.

Veritas yesterday delivered its much-anticipated 10-K filing to the US Securities and Exchange Commission (SEC). The software maker had twice delayed this fiscal year-end summary as it struggled to meet the first deadline of Sarbanes-Oxley (SOX). In particular, Veritas limped to meet Section 404 of SOX - the part dealing with internal controls and procedures for financial reporting.

Public companies choose their words very carefully when describing dealings with the SEC. In a statement last week explaining the 10-K "controls" delays, Veritas would only say, "One of the significant deficiencies relates to the company's controls over its order entry processes, while the other relates to its review of multiple element software license transactions." A spokesman declined to provide any more specific information.

Veritas isn't the only company with the 10-K problem. Some 300 publicly traded firms will fail to get their annual reports in on time because of SOX. Veritas, however, is special in that it has spent the last couple of years hawking its SOX-compliance expertise to customers, offering software and services that can help companies meet new federal accounting guidelines. It's also special with the 10-K problem being just one of a string of accounting irregularities.

Can someone sell Veritas a compliance package?

"Sarbanes-Oxley represents an opportunity for our business, and I continue to believe that," Veritas CEO Gary Bloom told ComputerWorld last year. "It's going to drive demand for storage and storage software in the long term."

Like many software vendors, Veritas has an entire section of its product line dedicated to handling compliance problems. What's first on the list of things Veritas can help you do? It can, "Define availability policies and establish IT internal controls commensurate to your business needs" and also "Demonstrate that business processes are being followed through audit logs and reports."

Most of the Veritas software helps out with making sure data is archived properly and that information can be found quickly if an auditor or lawyers needs it. The company can also help out with customer privacy controls. These issues certainly differ from the kinds of Section 404 controls difficulties Veritas itself seems to be experiencing. So this isn't an issue of Veritas not eating its own dog food as such.

But for a company preaching compliance expertise, Veritas isn't displaying a spotless track record to customers.

For example, in the 10-K report delivered this week, Veritas revealed a $35m settlement to clear complaints alleging "false and misleading statements with respect to (Veritas') 2000, 2001 and 2002 financial results." Veritas has restated its financial results on multiple occasions, changing figures from 2000, 2001, 2002 and 2003. The SEC is still looking into some of the matters that brought about these restatements.

"Since the third quarter of 2002, we have received subpoenas issued by the Securities Exchange Commission in the investigation entitled In the Matter of AOL/ Time Warner," Veritas said in its 10-K. In 2003, one of the restatements Veritas made was to reduce its revenue by $20m to make up for a sales/advertising deal with AOL. All of these restatements have resulted in numerous lawsuits from investors, leaving Veritas with one of the lengthier "Litigation" segments you'll find in a 10-K.

Veritas has a successful, solid business. It's not a flashy company. It leaves vendor bashing to rivals such as EMC and Sun Microsystems. Gary Bloom is also one of the more cautious CEOs you'll find. One would hope Veritas will get these issues behind it. The management at Symantec, which is in the midst of acquiring Veritas, must expect this will be the case.

In the meantime, however, Veritas' grand compliance push has lost a lot of its luster. A company spokesman declined to address this concern saying, "I'd limit our comments related to this to the public filings." And indeed, the filings speak for themselves.

In this climate, only the spotless can survive. This maxim holds especially true for those vendors trying to profit from an age of increased regulation and scrutiny. Veritas must have a near-perfect shop if customers are to see it as a more reliable compliance partner than an IBM or EMC. ®